SINGAPORE’S RECURRENT BUDGET SURPLUS THE ROLE OF CONSERVATIVE GROWTH FORECASTS

Tilak Abeysinghe and Ananda Jayawickrama

Macroeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: Aided by strong economic growth the Singapore government has been able to keep both the tax rate and the government expenditure rate low and yet generate healthy budget surpluses year after year. Although the gap between the tax rate and the government expenditure rate is the obvious source of the surplus, this paper shows the presence of another subtle source, a surplus generated by conservative growth forecasts that lay the base for revenue projections. An omitted variable bias in a model based on the tax smoothing hypothesis led us to consider the role played by the growth forecast error in predicting the budget surplus. Our computations show that on average the underprediction of the tax base (GDP) must have contributed about $376 million per year to the realized budget surplus over the period 1990-2005. This appears to be simply a byproduct of the Governments philosophy of fiscal prudence.

Keywords: Tax smoothing model; Reported and adjusted budget surplus (search for similar items in EconPapers)
JEL-codes: H61 H62 (search for similar items in EconPapers)
Date: 2007-01
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